HP Will Move Past This Dark Cloud

CEO Mark Hurd steps down amid sexual harassment allegations.

A Friday after-hours press release with major news is the modern business equivalent of Corleone family consigliere Tom Hagen offering to make "trouble disappear." By Monday, the news will be stale and investors will be focusing on the next major story.

Bury the newsSo when Hewlett-Packard(NYSE: HPQ) announced yesterday that CEO Mark Hurd would be stepping down amid sexual harassment allegations, the press release came promptly at 4:05 p.m. ET -- after trading had ended. It was a classic move from the public relations playbook.

But Hewlett-Packard took the practice to another level. It not only announced Hurd's departure, it bundled that news with preliminary third-quarter results. The company beat revenue estimates while topping analyst projections by a penny per share on the bottom line. It also raised full-year and fourth-quarter guidance, but the increased figure only put HP in line with current expectations. For technology firms reporting earnings, merely meeting guidance has been a recipe for investors to sell off shares.

I'll give credit where credit's due: HP took swift action and ousted Hurd when improprieties came to light. Yet the timing and style of the announcement leaves something to be desired. And while HP might hope that the bundled good/bad news shows its underlying financial strength, that's just smoke and mirrors.

I see this as simply burying all the bad news at once. Still, no matter how you feel about HP's actions, based on current after-hours trading, we're looking at more than $8 billion of shareholder wealth lost since Thursday's close.

Other than that, how was the play, Mrs. Lincoln?Aside from PR shenanigans, what does the move mean for HP?

Mark Hurd has been the company's CEO since 2005. During his tenure, Hurd has been lauded for making HP leaner and for moving into high-margin areas that provide better returns for shareholders.

In the past five years sales have soared, profit margin has steadily climbed, and return on equity has more than doubled. That's the kind of performance CEOs dream about.

Hurd deserves an immense amount of credit for those gains. His predecessor, Carly Fiorina, focused her energy on engineering a $25 billion deal to buy rival Compaq. The acquisition pushed HP further into the commoditized personal computer space, where intense competition from foreign rivals has pushed HP's operating margins down below 5%. HP's not alone in its struggles; rival Dell(Nasdaq: DELL) can barely even keep its head above the water. Dell's operating margin selling computers to consumers stands at less than 1%.

Hurd saw the folly of chasing computer prices to the bottom and emulated a light version of the IBM(NYSE: IBM) model. In 2008, he bought services firm EDS to bundle consulting and systems integration services with its hardware sales. Since then, HP's services revenue has risen to become the second-largest segment of the company. There's little doubt today that the EDS acquisition was a home run.

While Hurd might have steered the company in the right strategic direction, his reign at the top of HP is now over. Replacing him will be former CFO Catherine Lesjak. Don't look for Lesjak to become the next CEO, though; she's reportedly taken herself out of the running.

What major challenges does the next CEO have to face?HP is at a crossroads in several strategic areas. On the consumer-facing front, it recently acquired Palm to power its mobile ambitions. While Palm developed its world-class webOS operating system, it never really caught on with either consumers or developers. Still, despite previous failures for webOS, HP is going full steam ahead with developing gadgets for its new operating system.

HP has publicly abandoned plans to develop a Microsoft(Nasdaq: MSFT) Windows 7 tablet, and is also reportedly moving away from tablets based on Google's (Nasdaq: GOOG)Android tablet. As consumers shift to spending more money on smartphones and tablets, relying on an unproven operating system with few applications is a dangerous position for whomever takes over HP.

On the enterprise side of things, Hurd's replacement will need to continue building services and software momentum. One of the more interesting "threats" facing HP is Cisco's (Nasdaq: CSCO)push into servers. In response, HP has beefed up its ProCurve line of networking gear. Whoever succeeds Hurd will need to decide how strongly HP wants to keep competing with the networking giant.

Final thoughtsI'm disappointed with the way HP broke this news. Getting rid of Hurd shortly after allegations came to light appears to be the right move, but a Friday after-market-close press release bundled with pre-released earnings is below the company -- no matter how HP spins the news.

That said, I think HP will be fine. While the company is missing out on gains from the smartphone boom, it's also seeing strong profits in its services, software, and printing units. Even with some struggles in its consumer business in coming years, HP is well-positioned for growth.

Mark Hurd will leave under a dark cloud, but HP is still on a better path than it was five years ago.

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Author

Eric started at The Motley Fool in 2008 working in the Tech & Telecom sector. Today, he's the General Manager of Fool.com. You can follow him on Twitter to stay up to date with his tech industry analysis. Follow @bleekertech